Study of the Integrated Rail-Property Development Model in Hong Kong

Transcription

1

2 Study of the Integrated Rail-Property Development Model in Hong Kong BS Tang, YH Chiang, AN Baldwin and CW Yeung Research Centre for Construction & Real Estate Economics Department of Building & Real Estate Faculty of Construction & Land Use The Hong Kong Polytechnic University November 2004

3 Study of the Integrated Rail-Property Development Model in Hong Kong/ by Bo-sin TANG, Yat-hung CHIANG, Andrew Noel BALDWIN, Chi-wai YEUNG Published in 2004 by The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong. Acknowledgement The authors are grateful to the MTR Corporation for its support in this study. The authors also thank Siu-wai Wong, Doris Yu, Yong Li, Ho-chuen Chan and Hung-tat Cheng for their research assistance in this study project. Disclaimers This report is prepared for general circulation and it is circulated for general information only. Data and information contained in this report were obtained from sources that were believed to be accurate and reliable. However, the authors, their affiliated and reporting institutions do not guarantee the accuracy, adequacy and completeness of any information, stated or implied, in this report. The information and the opinion expressed do not constitute an investment advice, or an invitation to invest/disinvest in any companies. We accept no liability for any damage or loss arising from inaccuracies, omissions and the use of this report.

4 Contents List of Tables List of Figures List of Photos Executive Summary i-xvi 1. Introduction 1 Background Study Objectives & Framework Scope of Study & Research Questions Report Structure 2. MTRC: Background 5 Company Background Profits & Achievements MTRC Property Development Process Government Position about MTRC Property Development Rights Conclusions: MTRC Integrated Rail-Property Development Model 3. Theories & Applications 13 Introduction Benefits of Integrated Development Model Synergies between Transport & Real Estate Value Capture as Financing Mechanism Joint Development Towards Sustainable Urban Form & Living New Institutional Economics Institutions as Co-ordinating Mechanism Alternative Institutional Forms of Governance Applications Improving Public Sector Planning & Urban Design: Examples Responding to Imperfect Information & Uncertainty: Examples Internalizing Externalities & Maximizing Synergy: Examples Conclusions 4. MTR Achievements in Urban Development 39 Introduction MTR Catchment & Ridership Station Patronage & Land Use Characteristics Property Development & MTR Ridership Property Value & Integration with MTR Impact on Urban Redevelopment Planning & Design Features: Selected Stations External Benefits Conclusions

5 Contents (Con t) 5. MTRC s Financial Performance 81 Introduction Railway vs Property Development MTR vs KMB MTR vs KCRC Comparisons with Japanese Railway Companies Conclusions 6. International Review 89 Introduction Railway Impact on Property Development Land Use Impact on Transit Ridership Performance & Success Conditions Toronto Washington D.C. New York London Stockholm Guangzhou Shanghai Beijing Tokyo Singapore Conclusions: International Review 7. Summary & Conclusions 125 Introduction MTRC Integrated Rail-Property Development Model Summary of MTRC s Achievements & Benefits Linear City: a Critique Comparison with International Experiences Institutional Model: Successful Integration of Railway & Property Development Appendix 138 MTR Property Development Details References 140

6 List of Tables 2.1 Property Development Overview: Summary (as at April 2004) MTRC Operating Profits Typology of Value Capture Techniques MTR Station Catchment: As at MTR Average Weekday Patronage and Fare by Movement Weekday Total: MTR Station Ranking Weekday Morning Peak: MTR Station Ranking Weekday Evening Peak: MTR Station Ranking Land Use Data Correlation Coefficients Selected 19 MTR Stations: Land Use & Ridership Data Selected 19 MTR Stations: Regression Analysis Results Property Value Differences Commercial-office Redevelopment Sites MTR Patronage and Land Use Characteristics: Selected Stations Feeding Mode by Walking to MTR Stations Annual Passenger Journeys by KMB and MTRC Financial Data of Selected Japanese Railway Companies as of 31 March Key Statistics of the TTC, Key Statistics of the WMATA, GMC s Non- Railway Income Financing of Shanghai Metro Railway Key Operating Statistics, MRT System (year end 2003) 120

7 List of Figures 1.1 Study Framework MTR System Map MTRC Property Development Process: Key Aspects MTRC Integrated Rail-Property Development Model: Key Elements Synergy of Integrated Railway and Property Development Model Institutions & Organizations: Theoretical Perspectives Government, MTRC and Developers: Two Institutional Models Tung Chung Development: Comparison of Master Plans MTR Property Development at Tung Chung Tseung Kwan O Town Centre Development: Initial Master Plan Tseung Kwan O Town Centre Development: Revised Master Plan Tsing Yi Station Development: Master Plan Institutional Function of Different Organizations: Four Dimensions MTR Average Weekday Patronage Market Share of MTR in Public Transport Property Price Movement Property Redevelopment (HK Island & Kowloon) Property Redevelopment (Kowloon) Property Redevelopment (HK Island) Proposed West Island Line/South Island Line Alignments KMB versus MTRC and HSI Linear City Concept Institutional Models for Successful Integrated Railway and Property Development 135

8 List of Photos 3.1 Maritime Square & its Excellent Connection with Tsing Yi Station Remedial Connection between Admiralty MTR station and Pacific Place Congested Interface Area connecting New Town Plaza & Sha Tin KCRC Station Compact Mixed Land Use Development around Chai Wan Stations Footbridge Connections with Chai Wan Station Shopping Centres connected to Chai Wan Station Tierra Verda above Tsing Yi Station Maritime Square Weather-free Connection between Maritime Square and Tsing Yi Station Po Lam Station Footbridge Connection to Shopping Mall around Po Lam Station Tseung Kwan O Station Unpleasant Walking Environment to Tseung Kwan O Station Development around Yau Tong Station Unattractive Local Shopping Mall Competing Bus Services Housing Project above Guangzhou Metro Line 1 station Poor Integration between Guangzhou Metro Lines and Property Development 112

9 Study of Integrated Rail-Property Development Model in Hong Kong - Executive Summary Background 1. In September 2003, the MTR Corporation (MTRC) approached the Research Centre for Construction & Real Estate Economics of The Hong Kong Polytechnic University with a request to undertake a study of an essential element of its business operations known as the integrated rail-property development model. The MTRC wants the study to ascertain, from both theoretical and empirical perspectives, the impacts and benefits generated by this development model. 2. The main objectives of this study are to: (a) (b) (c) explore how the MTR integrated rail-property development model has effectively contributed to the urban development of Hong Kong; examine the critical success factors and conditions conducive to the implementation of this model in Hong Kong; and determine how this unique model can be successfully replicated elsewhere, especially in the Mainland Chinese cities. 3. This is the Final Report of the study. It contains seven sections. Sections 1 and 2 are background chapters. Section 1 provides the study objectives, study framework, scope of study and key research questions. Section 2 gives a brief outline of the key business characteristics and operations of the MTRC. 4. Sections 3 to 6 contain the study findings. Each section begins with an Introduction which spells out the specific research questions to be examined there. It ends with a sub-section entitled Conclusions that provides the answers to those questions. Section 7 summarizes and concludes the study. 5. This Executive Summary highlights the key conclusions in this study, in the format of Questions and Answers. What is the integrated rail-property development model? 6. An integrated rail-property development model represents a unique approach of the MTRC in handling the relationship between railway and land development. 7. It is more than a simple combination of railway and property. It is not the same as the integrated railway and property development projects above stations; these are only the outcomes of the model. 8. The model has four principal elements (Figure 2.3) : i

10 Figure 2.3 MTRC Integrated Rail-Property Development Model: Key Elements POLICY MTRC PROCESS ORGANIZATION PROJECT Source: Authors (a) Policy: Favourable government policy support in terms of its exclusive land grant to the MTRC and its commitment in mass transit railway as an essential mode of public transport. (b) Process: Superb planning, management and control procedures and effective development processes that seek to maximize the synergy between railway and property from the stages of project inception to completion. (c) Project: Development of high-quality real estate projects that contain high development density, appropriate land use diversity and attractive layout design and integrate well with the railway facilities at the appropriate locations and at the right timing. (d) Organization: A well-experienced and efficiently managed company that is committed to providing world class railway services and developing topquality property development projects in order to enhance the quality of life in Hong Kong. ii

11 What are the benefits generated by the synergy of integrating railway and property development? 9. An integration of railway and property development is expected to generate the following key social and economic benefits (Fig. 3.1): (a) Railway - Urban rail transit will significantly improve the land value around the stations. By capturing these values through property development and other means, the railway operator can finance the construction of the urban railway. (b) Property - Intensification of development density of the land around railway stations will improve the ridership of the railway and hence its operational viability. (c) Government - The government can receive financial gains in terms of the land premiums generated from property development of the station sites, a higher level of rates from private properties with improved accessibility and other monetary returns on railway operations (if owned by the government). Furthermore, the government is not required to subsidize the operations of the railway if it is financially sustainable. (d) Society & Economy - Society at large achieves a more sustainable form in terms of the compactness of urban development, more efficient use of scarce urban space, more open space, less urban sprawl, fewer roads, reduced air pollution from cars, and improved pedestrian-friendly environment. All these features can enhance the overall quality of urban life characterized by improved health, better convenience, greater diversity of life style and more time saving. The economy will equally be benefited as a result of the improved efficiency in transport and human activities. iii

12 Figure 3.1 Synergy of Integrated Railway and Property Development Model GOVERNMENT Financial benefits Finance construction & improve ridership Property SYNERGY Railway Improve accessibility & land value Sustainable urban living & growth generation SOCIETY & ECONOMY Source: Authors iv

13 Why, in theory, should the integrated rail-property development model be implemented by a single entity like the MTRC? 10. New institutional economics provides the most appropriate theoretical framework in addressing this question. It recognizes that market transactions between the contracting parties are not cost-free. High transaction costs exist in land development activities and reduce efficiency. Implementation by the MTRC as a single entity helps to reduce the high transaction costs because: (a) (b) (c) (d) (e) Asset Specificity: MTR station and its above-station property development are intimately linked in many aspects such as site footage, civil works, and ancillary services. It is extremely costly and difficult to disentangle and divide all these activities into separate contracts if they are not planned, supervised and managed by a single entity like the MTRC. Imperfect Knowledge: The MTRC has accumulated lots of specialized experience in planning and developing integrated railway-property development. This can decrease the negotiation, monitoring, enforcement and search costs of all the contracting parties in undertaking the development activities. Reducing Uncertainty: The MTRC has the organizational flexibility and capability to adjust to the unforeseeable market changes in the development environment. The corporation is disciplined by the financial market, the property development industry and the government in operating efficiently on prudent commercial principles. Internalizing & Enhancing Value: Given the exclusive rights of planning and developing the landed property of its stations, the MTRC has the incentive to protect, enhance and capture the value of its assets. It is in a strong position to delineate all the rights of the contracting parties to benefit from the land and hence maximize the synergistic effects associated with the integration of railway and adjoining property development, e.g. their timely completion. Value Protection: The MTRC has well-defined corporate missions, objectives and tasks, which are widely known to the public, the government departments and the developers. The incentive structure for the MTRC is such that it has an interest to constrain opportunistic behaviour, cheating and non-compliances of the involved parties such as the developers and the contractors. v

14 What is an alternative approach in implementing the integrated rail-property development project? Why is it not preferable to the MTRC model? 11. An alternative approach refers to the government disposal of individual land parcels separately (a) for property development by the developers, and (b) for railway construction by a transport agency. 12. This represents government planning, assignment, attenuation, and restrictions of private individual rights over the use of land resources in and near railway stations. This institutional form of land use governance involves public-sector decision making, statutory framework and third-party regulation and enforcement by the government. 13. Under this approach, the statutory town plans, land lease documents, the government land sale programmes, and the government policies and regulations provide the principal coordinating mechanisms in bringing together all the key players in developing the sites. Project implementation relies mainly on the interactions between the railway operators, developers and various government departments, their interpretations of the many government policy regulations and contracts, and their compliance with the conditions imposed upon them. 14. This coordinating mechanism is not preferable because, in theory, it will lead to higher transaction costs and lower efficiency, and in practice, it cannot generate the desirable development outcomes provided by the MTRC model. 15. The success of the MTRC model lies in the proper alignment of the institutional role of the corporation with its objectives, tasks, requirements and decision-making environment (Fig. 3.9). 16. Eliminating the MTRC within this institutional setup implies either: (a) (b) an expansion of the government and private developers into areas and functions which they are neither good nor proper at performing; or leaving a gap between strategic policy objectives and detailed implementation at the site level, between policies and deals, and between balancing public and private interests. vi

15 Figure 3.9 Institutional Functions of Different Organizations: Four Dimensions TASKS Create Environment Coordination Implementation Strategic, territorial REQUIREMENTS Site-specific Government Policy Making MTRC Market Players Deal Making Public Interest Private Interests OBJECTIVES DECISION-MAKING Source: Authors vii

16 What are some examples of applying the MTRC model in achieving better development outcomes? 17. The MTRC model provides better development outcomes as illustrated in the following examples: (a) By improving the original government planning and design of the Tung Chung above-station development, the MTRC approach has delivered a landmark development project that receives wide public applause and maximized its returns by capitalizing on the full seaview potential of its land resources. (b) The MTRC approach reacts responsively and flexibly to meet the current market needs by proposing a change of the land uses of the town centre at Tseung Kwan O station, the initial planning proposal of which was prepared some 14 years ago. (c) The MTRC model allows all development options to be evaluated at the planning stage before implementing a final, optimal scheme. Maritime Square at Tsing Yi station characterized by seamless space integration and maximum convenience to all - demonstrates how the synergistic effects between railway and property are maximized and enhanced through this process. (d) By means of Development Agreements, the MTRC will ensure compliance of the developers in implementing the adopted master plan proposals of the station development. This is better than subsequent separate negotiations between the railway operator and the adjoining property owners, which often produce second-best and remedial outcomes. Examples include the new underground pedestrian links between Pacific Place and Admiralty MTR station, and between Times Square and Causeway Bay MTR station. (e) Real estate interests and transport objectives are not necessarily compatible. Separate considerations may lead to conflicts, diseconomies and inefficiency to both parties. Example refers to the congested interface areas between KCRC Sha Tin station and the New Town Plaza. What is the position of the Hong Kong government about the MTRC model? 18. The government has been highly supportive of this model. It considers that the grant of exclusive property development rights of the station areas to the MTRC is an essential part for achieving the benefits of the integrated rail-property development projects in Hong Kong. viii

17 What are the respective roles of the government, the MTRC, and the developers under the MTR integrated rail-property development model? 19. The government creates a favourable incentive and constraint environment, sets major policy objectives of strategic and territorial nature that take into account the public interest in connection with the joint development of the mass transit railway and station property. 20. The property developers are responsible for implementing the projects subject to the site-specific requirements and the deals agreed in connection with the joint development. 21. The MTRC acts as the intermediary between the government and the developers for coordinating the implementation of the joint development projects, converting strategic objectives into site-specific requirements, transforming policies into deals and balancing possible conflicts between public and private interests. What are the study findings about MTR achievements in urban development in Hong Kong? 22. This study has the following key findings: (a) (b) (c) (d) MTR is a key transport service provider and its network has extensive spatial coverage in the territory. Over 2.78 million people (over 41% of the total population) and over 1.34 million workers (over 41% of the territory total) live within 500 m of an MTR station. Over 43% and 20% of the housing units in Hong Kong lie within 500 m and 200 m, respectively, of an MTR station. MTR takes up a market share of over 24% of the total public transport ridership. MTR provides a major transport function for the working population during the morning peak hours by connecting the housing areas with the employment districts. During the evening peak period, MTR provides essential transport services for the purposes of return-home trips and other off-business hours social activities in the existing urban districts. 23. This study confirms the positive relationship between property development and MTR as follows: (a) (b) High concentrations and densities of both population and employment are associated with high MTR station ridership. It is estimated that every single unit of public housing unit and of private housing unit within 500 m of an MTR station account for about 1.97 and 1.62 passengers, respectively, using the station as an origin on a typical day. These figures will increase for housing units within 200 m of an MTR station. The clustering of private housing units around MTR stations tends to exert a greater impact on the ridership than public housing. ix

18 (c) (d) (e) (f) Mixed land uses, compact environment, exciting street-level activities in the existing old urban districts promotes MTR patronage. Integrated rail-property development projects in the new development districts, comprising good layout, attractive design, well-managed shopping facilities and efficient pedestrian connections with the surrounding district context, enhances MTR ridership. Successful development normally includes extensive pedestrian connections that are convenient, direct, safe and pleasant. Integrated rail-property development projects tend to give higher property values. The analysis of some sample housing estates indicates that the additional premium ranges between HK$98 and HK$280 per sq. ft. gross floor area. MTR affects urban development activities and encourages land owners to redevelop their land for higher-value uses. How is the financial performance of the MTRC? 24. This study confirms the economic benefits of financial synergy and risk diversification generated from integrating railway and property development by the MTRC. It has the following key findings: (a) (b) (c) Railway investment is not financially viable on its own. MTR achieves virtually zero rate of market return on its railway. Property development has been the only source of return of the company to meet the investors demand for market return. The MTRC has much higher proportion of property revenues, lower debts and higher profitability than many of its private Japanese counterparts which jointly operate railway and property development business. The financial performance of the MTRC compared less favourably to that of the Kowloon Motor Bus (KMB) within the study period. This was largely due to the construction of public roads by the government instead of KMB, other contextual reasons (e.g. franchise and taxation privileges granted to the KMB) and the inherently different nature of the transport business (e.g. flexible adjustment of spatial coverage of bus routes versus fixed railway tracks). 25. If the MTRC were allowed to expand its railway network, or simultaneously provide franchised public bus services under the same policy terms and conditions granted to the KMB, the financial synergy arising from public transport and property could be much higher. x

19 What are the external benefits generated by the MTR to the society? 26. Mass transit railways also create external benefits, which are values generated by the projects to the community but have not been internalized by the railway companies, including travel time saving, employment gains, environmental health benefits, property value increases and so on. 27. A recent MTRC study concludes that the proposed West Island Island/South Island Line project could generate an annual benefit of between HK$2.6 and 3 billion per year. The existing MTR network of over 87 km obviously generates enormous external benefits to the society as a whole as it passes through the densely populated districts, major commercial and employment centres and carries large passenger loads. What does the research literature tell us about the relationship between transit railway and property development in other parts of the world? 28. The research literature indicates that the impact of rail transit on property development and performance have mixed results in different cities. Local circumstances and property market conditions will affect whether railway can positively influence the property values and land use changes. 29. On the other hand, the positive influence of land uses on transit ridership appears to be less controversial in the research literature. Many research studies indicate that master-planned, high-density, mixed use and compact development can lead to higher transit ridership. What are the 10 selected cities reviewed in this study? What are the key lessons from the review of their implementation of joint railway and property development? 30. This study has reviewed the experiences in 10 cities including Toronto, Washington, D.C., New York, London, Stockholm, Guangzhou, Shanghai, Beijing, Singapore and Tokyo. 31. The key lessons are: (a) (b) (c) All railway operators in these cities (except Tokyo) are public bodies which are functionally, operationally and financially linked with the public authorities and the local governments. Tokyo stands as an exception with its privately run railway companies. Almost all of them operate other modes of public transport, e.g. public buses, in addition to metro railways. This has often made them the principal providers of mass transit services in the cities. Mass transit railway is unlikely to be self-financing on its own. Almost all of them have to rely on government subsidies. Japanese railway xi

20 companies rely on the profits from real estate to subsidize its railway operations, in addition to the generous government subsidies. (d) (e) (f) Property development is not normally their core business in other cities, except in Tokyo. Strong economic growth and buoyant real estate markets are essential to support the construction of mass transit railway in the cities. Government favourable policy support and the business strategy and acumen of the railway operators are important elements in determining whether they will be active and successful in engaging in property development business. What are some key differences of the MTRC when compared with the experiences in these cities? 32. In comparison with international experiences, the MTRC model contains some unique features including: (a) The MTRC does not operate other modes of public transport, except the mass transit railway, making it a more focused transport company. (b) The MTRC engages actively in property development and investment activities. However, unlike the case in Tokyo, it is not privately owned. (c) The MTRC does not rely on government s subsidies to support its daily operations on a regular basis. (d) Property related incomes play an important contribution to the MTRC operations. (e) Operating on prudent commercial principle, the MTRC s market-oriented business strategy and approach ensures that it will only pursue financially viable projects (avoid purely public welfare projects) and set appropriate fare levels. (f) Government grant of exclusive property development rights of the station sites to the MTRC and the arrangement of land premium payment by property developers eliminate the land holding costs of the corporation. These relieve a major financial burden on the MTRC in the process of land banking and acquisition. xii

21 What implications can this study draw on the Linear City concept recently proposed by the KCRC? 33. This study has raised some concerns about the Linear City concept which proposes the development of single types of land use nodes and their spatial separation by railway stations because: (a) (b) (c) (d) (e) Mixed land use development on and around transit stations is an important element contributing to railway ridership. Single land use development works against the concept of transit-oriented developments (TODs). High-density development is another crucial success factor. The proposed development of community facilities, entirely on its own, would not enable the railway operators to fully capture the land value associated with improved accessibility to the land around stations. Development of a single type of land use around stations does not increase railway ridership. It underutilizes the railway, creates undesirable one-way flow of traffic and generates inconvenience to the riders. There is a need for an extensive transport network that provides efficient feeder service to the railway. A good transportation system is to minimize unnecessary transportation. People should not be forced to travel on the railway more than absolutely necessary especially because the facilities are deliberately not being located within their easy reach. xiii

22 What are the critical factors and conditions conducive to the successful implementation of integrated rail-property development? 34. The benefit of integrated rail-property development does not come about naturally. It requires an appropriate institutional framework for successful implementation. This framework covers issues that are external and internal to the railway operator. 35. An institutional model (Fig. 7.2) is proposed that highlights the critical success factors to achieve such integration. The success factors are: (a) Urban Factors Healthy growth urban economy, especially a strong property market The public is generally receptive to compact, high-density development and the use of public transit (b) Government Policy Support Supportive government policies in regional planning, land grant, high-density zoning around railway stations and urban growth management Complementary public transport policies in controlling other alternative modes of transport such as automobile ownership, vehicle and taxation, parking, competing public bus services, transit subsidies, and so on. (c) Railway Operations Provision of safe, convenient and reliable transport service commensurate with its fare Top-class management of railway services in terms of train frequency, transfer between different modes, cleanliness and security management. (d) Property Planning & Design High development density around stations Attractive property/station design and land use mixes xiv

23 Figure 7.2 Institutional Model: Successful Integrated Railway and Property Development URBAN FACTORS External to Corporation E PLANNING/ DESIGN POLICIES Successful Railway/Property Integration GOV T POLICIES Internal to Corporation RAILWAY OPERATION POLICIES Source: Authors Can the MTRC integrated rail-property development model be replicated in other cities? 36. Replicating the MTR above-station property development projects in other cities does not necessarily achieve the benefits of the integrated rail-property development model. Importantly, the model is not the same as the project; the model contains the policy, process, organization and finally the project. 37. Some external urban factors and complementary government policies are essential institutional factors in contributing to the success of the model. 38. The extent in which the success of the MTRC model can be replicated depends on whether all these essential components are in place. xv

24 Overall, what are the socio-economic benefits generated by the MTR integrated railproperty development model in Hong Kong? 39. The model generates the following social and economic benefits in Hong Kong: (a) Increase MTR ridership, reduce road traffic and thus lessen the need for more road construction (and reclamation) (b) Enable comprehensive planning and development of the station site and increase its overall property values (c) Concentrate land development and urban activities around the stations and reduce urban sprawl (d) Promote walking with the provision of safe, direct, efficient, convenient, weather-free and pleasant pedestrian connections with the stations (e) Enhance diversity of land uses and urban life (f) Enable travel time saving and road safety benefits (g) Create positive impacts on property values within the railway catchment (h) Generate financial gains to the government in terms of increasing property rates, taxes and land premiums (i) Achieve financially sustainable railway development and operation without the need of public subsidy (j) Enhance environment health benefits in terms of reduction in roadside pollution (as a result of less road traffic), decrease in government medical expenditure and productivity gains (due to healthier workforce) (k) Encourage rejuvenation and redevelopment of the older urban areas along railway catchment (l) Provide possible increase in employment opportunities - End of Executive Summary - xvi

25 1. Introduction Background 1.1 In September 2003, the MTR Corporation (MTRC) approached the Research Centre for Construction & Real Estate Economics of The Hong Kong Polytechnic University with a request to undertake a study of an essential element of its business operations. This element is referred to as the integrated rail-property development model, which entails an integration of urban mass transit railway and high-density property development at the station areas. This unique Hong Kong model has achieved high regard internationally. Many Mainland Chinese cities have shown a keen interest in adopting this model for building their urban mass transit systems. 1.2 The study formally commenced on 24 September It was completed by the end of May Study Objectives & Framework 1.3 The MTRC wants this systematic study to ascertain the impacts and benefits generated by this development model. Specifically, the main objectives of this study are to: (a) (b) (c) explore how the MTR integrated rail-property development model has effectively contributed to the urban development of Hong Kong; examine the critical success factors and conditions conducive to the implementation of this model in Hong Kong; and determine how this unique model can be successfully replicated elsewhere, especially in the Mainland Chinese cities. 1.4 The apparent success of the MTR integrated rail-property development model can be examined from both theoretical and empirical perspectives. Figure 1.1 illustrates diagrammatically the study framework. The idea is that, if the MTRC model is a replicable model, it should demonstrate how it works in theory, in what way it has been successful and the conditions under which its desirable outcomes can be made possible. 1

26 Fig. 1.1 Study Framework Empirical Analyses Key Questions Urban Impact Analysis Success? THEORIES Institutional Analysis Conditions? Replicable Model? Financial Analysis Scope of Study & Research Questions 1.5 This study is focused on three major aspects: (a) Urban Impact Analysis This part of the analysis examines some key interrelationships between land use changes and MTR in Hong Kong. It addresses the following questions: (i) how the mass transit system influences urban land development; (ii) how the land use characteristics benefit ridership of the mass transit railway; and (iii) how the synergy is created through the integration of railway and property in terms of social and economic benefits. The study findings in these aspects will help to identify and quantify some of the key impacts of the MTRC on urban development of Hong Kong. (b) Institutional Analysis Due to different institutions, the empirical implications of the urban railway system remain varied in different cities. Institutions refer to the contextual factors, the agency interests, the formal rules of the game and informal practices in influencing human and organizational behaviour in the society. Informed by the new institutional economics theories, this part of the analysis will emphasize, amongst others, the importance of property rights systems and government regulatory framework in creating and capturing values in social and economic transactions. Specifically, the study has examined the prevailing institutional 2

27 arrangements of the MTRC in relation to the aspects and processes of land leasing, joint development with the private developers and co-operative planning with the government. It has expanded the review of the experiences in selected overseas and Mainland Chinese cities. The objective is to identify the essential public policy elements and action framework for planning and property development, which constitutes the unique MTRC model in Hong Kong, and the results of not having such an integrated approach. (c) Financial Analysis Property and transport are the two key elements in financing the operations of the MTRC urban rail development model. This study has examined the financial aspects of the company, illustrated how the mass transit railway and property development/investment have been contributing to its value, competitiveness and profitability, and identified the synergy when integrated railway and property business are carried out by one single entity, the MTRC. Report Structure 1.6 Following this Introduction, this report is divided into six sections: (a) (b) (c) (d) (e) (f) Section 2 provides a brief outline of the key business characteristics of the MTRC, its property development process, the government s relevant policy setting and the essential components of the integrated rail-property development model in Hong Kong. Section 3 introduces the theoretical justifications behind the integrated rail-property development model. Section 4 identifies some major beneficial impacts of the MTR s model in urban development of Hong Kong. Section 5 discusses the financial performance of the MTR. Section 6 reviews the literature about similar experiences internationally and examines such development in 10 selected cities in other parts of the world. Section 7 concludes the study, summarizes the key benefits of the model and identifies the essential institutional factors leading to its successful operation and implementation. 3

28 4

29 2. MTRC: Background Company Background 2.1 The MTRC is a highly reputable and profitable company. In 2003, its net profits reached HK$4,450 million, an increase of 24.3% over 2002 (MTRC, 2004), and its credit ratings have consistently achieved the investment grades. Established since the mid-1970s, the MTRC has carried out its missions of constructing and operating, on prudent commercial principles, a mass transit railway, which now constitutes an integral part of the public transport system in Hong Kong. The Hong Kong Special Administrative Region (HKSAR) Government was the sole owner of the MTRC until October 2000, when about 23% of its shares have been privatized and traded in the stock exchange. Hong Kong MTR is undoubtedly one of the most successfully builtand-operated infrastructure projects by the world standards. 2.2 The HKSAR Government has committed to maintain not less than 50% shareholding in the Company for at least 20 years from the date of the initial public offering in October The MTRC shall continue to be perceived by the capital market as a public company. The risk premiums demanded by the debt investors should not be more than what is commensurate with the sovereignty risk of the SAR itself. The company was the first in Hong Kong to obtain international credit ratings, and has since then enjoyed the same ratings as the Government itself from Moody s, Standard & Poor s and R&J. 2.3 Opened since the late 1970's, the MTR has significantly transformed the intra-urban travel patterns in the territory. With a total route length of over 87 km, the MTR connects the airport and the densely populated corridors in the urban area (Fig. 2.1). In 2003, it carried over 2.24 million passengers during an average weekday. This patronage took up around 24.3% (second to bus services) of the total market share within the franchised modes of public transport in Hong Kong (MTRC, 2004). 2.4 Apart from railway operations, the MTRC has also engaged in property development. Real property is expected to contribute to the business of the MTRC in two ways. First, it provides an important source of income to finance the construction of the railway projects 1. Second, the completed property development creates immediate population catchment areas that contribute to the patronage of the railway. In joint venture with the private developers, the MTRC has been undertaking development of many high-density residential estates and up-market commercial projects in the territory (Table 2.1 and Appendix I). It has established a track record not only for planning but also managing the property development process on railway station areas. 1 According to Gold (1976), the MTRC initially planned to use property to add 25% to the railway revenues. 5

30 Figure 2.1 MTR System Map 2.5 The MTRC is holding some of the completed property developments for long term investment and it also provides property management services 2. The total value of its investment properties amounted to about HK$14.2 billion and its net rental income reached HK$684 million in 2003 (MTRC, 2004). The company has now become an established prominent player in the local property market. Table 2.1 Property Development Overview: Summary (as at April 2004) Line Current Development Status Residential Commercial / Shops G.F.A. Office G.F.A. Hotel/Service Apartment G.F.A. Government Institution & Community Area No. of Carparks Urban Lines Airport Railway Fully completed* Partly completed (no. of units) (sq.m.) (sq.m.) (sq.m.) (sq.m.) 29, , , ,092 5,045 28, , , ,722 N.A. N.A. Tseung Kwan O Lines Partly completed 29, , ,130 N.A. N.A. N.A. * Notes: Except Choi Hung Station Development which involves one residential block. Data Source: MTRC 2 As at 31 December 2003, this property portfolio included over 174,700 sq.m. of commercial and office space and about 4,190 car parking spaces. The company was providing management services for some 46,915 housing units and 558,796 sq.m. of commercial and office floor space (MTRC, 2004). 6

31 Profits & Achievements 2.6 Property development and investment have made significant contributions to MTRC s profits. Table 2.2 below shows that the portion of operating profits from property development has increased from 30% in 1998 to nearly 60% in Table 2.2 MTRC Operating Profits Total Operating Profit ($ m) Operating Profit from Railway and Related Operations (% of Total) Operating Profit from Property Development (% of Total) Source: MTRC Annual Report, various issues. 2.7 The MTRC has thus been engaging in three core business activities: (a) the provision of mass transit railway (including its design, construction and maintenance), (b) property development, and (c) property investment and management. The first two core activities are particularly capital intensive. It is therefore not unexpected that the company has quickly become the 10th largest stock in the Hang Seng Index after its initial public listing on the Hong Kong Stock Exchange since October MTRC Property Development Process 2.8 A special, if not unique, feature of the firm is that it is operating on commercial principles and financing on its own terms 4. To make this a reality, the company has to rely heavily on the property-related sources of revenue. In other words, property development is used to subsidize construction and development of the railway. 2.9 According to MTRC (2000), the typical development process normally involves the MTRC to plan the alignment of the railway line with the government and assess the construction costs. The company will then discuss with the government the related property development opportunities that enhance the rate of return on the overall investment. The project agreement between the MTRC and the government for the construction of the railway line typically contains the undertakings from the government to grant land for property development at identified sites along the 3 Its market capitalization, as at 31 December 2003, amounted to HK$54,209 million (MTRC, 2004). 4 In a study conducted by the Legislative Council of Hong Kong (Liu, et al., 1996) on the mass transit systems in six cities (Osaka, Seoul, Toronto, London, Singapore and Hong Kong), only Singapore and Hong Kong were found to be operating on commercial principles. Further, unlike Singapore where the construction cost was borne by the government, the mass transit system here is financing on its own terms. According to the international surveys done by Barron et al. (2001), Hong Kong is the lone exception that government capital grants do not cover a major portion of its capital costs. The government only injects equity capital and requires a market return on the MTR operations. 7

32 alignment. The company will apply for and obtain all the necessary statutory planning approvals for the developments and negotiate the terms of the land grants with the government Private developers are solicited by the MTRC as the partners in implementing the projects. The development packages are offered to the developers through public tenders. Tender packages normally contain a design scheme prepared by the company to assist developers to respond to the tender and, if awarded, to implement the development 5. Successful private developers are responsible for the detailed design of an awarded development package in accordance with the specifications of the development agreement with the MTRC. The MTRC will carry out the civil works and enforced the technical control standards and requirements for interfacing between its railway premises and the property development 6. The property developer is responsible for all development costs, including the land premiums, construction costs, finance costs, professional fees, marketing costs, and expenses related to the selling and leasing of the completed properties The MTRC derives economic benefit from property developments through profit sharing with the developers in agreed proportions of any cash profits from the sale or lease of the properties, the sharing of assets in kind, or through up-front payments from developers. A 'no cash, no risk' approach has been adopted in its joint venture partnership with the developers (Cheng, 1988). The MTRC will not allow the property interests to be used as collateral by the developers to seek finance. Equally, the MTRC will not be liable under the joint venture agreement to any losses arising from the development. The developers have to take up all the losses Figure 2.2 summarizes the key aspects of the above typical development process in a graphical form. 5 Typically, there are four broad stages in the development award process: (a) Shortlisting stage: Interested parties are invited to submit, for evaluation, an expression of interest together with the details of their corporate structure, development experience, marketing and management abilities. The MTRC will then draw up a shortlist of developers. (b) Consultation stage: Short-listed developers are then briefed on the details of design and master layout plan and any interface between the railway and property development works. (c) Tender invitation: Short-listed developers are further invited to submit tender proposals for the development packages. The selected tenders are then invited to submit offers. (d) Award: Following the completion of the tender process, the terms and conditions of the development agreement will be finalised and a property development contract is entered into between the company and the successful developer. 6 The MTRC, being the grantee of the land, remains primarily responsible for the fulfilment of all the conditions and obligations under the land grant for the development. Such conditions and obligations include the type and quality of the development that must be built, the government facilities to be provided, the completion date of the project and the payment of the land premium (for which developers are responsible under the terms of a typical development agreement). 8

33 Figure 2.2 MTRC Property Development Process: Key Aspects MTRC Involved Parties Railway Planning Government Construction Cost Assessments Property Development Potential PROJECT AGREEMENT Government Secure Planning Approval Government In-principal Land Grant Government Negotiate Land Premium Secure Land Grant Government Tender Development Package Property Developers Sign Development Agreement Property Developers Land Premium Payment Property Developers Project Construction Property Developers Source: Authors Completion/Profit Sharing Property Developers 9

34 Government Position about MTRC Property Development Rights 2.13 The government s grant of exclusive property development rights of the station areas to the MTRC is an essential part for implementing integrated rail-property development projects in Hong Kong. In defending this policy, the government has put forward the following reasons and arguments about the benefits of this approach (Transport Bureau, 1999): (a) The government considers it necessary, for planning, safety and technical reasons, to allow property development above railway stations and depots, and on land adjacent to the railway, as an integral part of the railway development. (b) The 25-year of MTRC experience in designing and constructing property above railway station presents the most effective use of resources. (c) Most optimal planning, development and utilization of the station site is possible under a coordinated approach that ensures the timely and efficient completion of the necessary infrastructure and property enabling works such as foundations, utilities trenches and internal roads. (d) With a single entity managing both the property development and the railway, a clear definition of responsibilities can safeguard the safety and operational aspects of the railway and a proper management of the interface between property development and the railway. (e) The MTRC s involvement in sharing the profits from property development helps to discipline the corporation financially and enables it to fund and operate the railway system on a commercially prudent principle without the need for government subsidy 7. (f) An alternative approach that involves separate government disposal of the property development sites to the developers could have a depressing effect on the land premium bids because the developers may factor into their bids additional costs relating to the coordination with and possible 7 Transport Bureau (1999:2) states that property development right is not a form of subsidy to MTRC. A subsidy consists of either Government expenditure or revenue foregone. The grant of property rights to MTRC, on the other hand, does not come into any of these categories as full market premium for the land is charged. These statements are not, strictly speaking, correct. To obtain the development rights, the MTRC is required to pay the government a land premium based upon the current market value or the resumption costs incurred by the government, whichever is the higher. A favourable government policy is laid down for land premium assessment for the MTRC property projects. Under this policy, the amount of land premium payable by the MTRC would be assessed on a full market value basis, however, ignoring the presence of the railway for the first land grants for property development rights in relation to each new railway project. This implies that the additional land value embedded in the improved railway accessibility to the development has been waived by the government. This is a kind of potential government revenue foregone. However, it is fair to say that, in order to capture this additional value, the MTRC is required to carry out careful planning and development of its property projects, especially the integration with the railway. 10